Converting an LLC to a Corporation in Washington D.C.
If you are planning on converting an LLC to a corporation in Washington D.C., here's what you need to know.
The details of how to convert your Washington, D.C. limited liability company (LLC) to a Washington, D.C. corporation will vary depending on your specific situation. However, here is some general guidance on the process of conversion to a for-profit corporation.
The District of Columbia’s Conversion Statute
In Washington, D.C., you can use a relatively new, simplified procedure that allows you to convert your business from an LLC to a corporation largely by filing a few basic documents with the Department of Consumer and Regulatory Affairs (DCRA). This procedure, technically known as “statutory conversion,” automatically transfers your LLC’s assets and liabilities to the new corporation. Unlike other methods of conversion, only one business entity is involved: you do not need to separately form a corporation before the conversion can occur. By the same token, there is also no need to dissolve your LLC. Instead, under the D.C. conversion statute, your business is considered to be “the same entity without interruption as” the LLC that existed before the conversion. The conversion procedure is codified primarily in Sections 29-204.01 through 29-204.06 of the District of Columbia Official Code (D.C. Code).
To convert your Washington, D.C. LLC to a Washington, D.C. corporation you need to:
- prepare a plan of conversion
- get the LLC members to approve the plan of conversion; and
- file a statement of conversion and articles of incorporation with the DCRA.
The plan of conversion contains key information about the conversion. It must include:
- the name and legal “type” of your business before conversion (type = for-profit limited liability company)
- the name and legal “type” of your business after conversion (type = for-profit corporation)
- the jurisdiction for your new corporation (Washington, D.C.)
- the proposed articles of incorporation for your new corporation
- the proposed bylaws for your new corporation; and
- “the other terms and conditions of the conversion” (this very likely will include, among other things, the basis for converting LLC membership interests into corporate shares).
The D.C. conversion statute itself does not contain specific rules for approval of the plan of conversion. Instead, you need to rely on the rules for approving a merger, which are contained in D.C.’s LLC merger statute. (A merger is legally distinct from a conversion.) Under the applicable law, approval requires the unanimous consent of all LLC members. (Unlike some other jurisdictions, D.C. does not allow for the possibility that a lesser majority vote is permitted, for example, in your LLC’s operating agreement). For more details, check D.C. Code § 29-809.03.
The statement of conversion contains some of the same information as the plan of conversion, as well as a few other items. More specifically, it must include:
- the name, jurisdiction of organization, and legal “type” of your business before conversion
- the name, jurisdiction of organization, and legal “type” of your business after conversion
- the effective date for the conversion, if other than the filing date
- a statement that the plan of conversion was approved in accordance with D.C. Code §29-204.05
- as an attachment, the new corporation’s articles of incorporation; and
- one or more authorized signatures.
A blank statement of conversion form is available for download from the DCRA.
The articles of incorporation will contain basic information about your new corporation. Required items include:
- its name
- the number of shares it’s authorized to issue
- the name and D.C. address of its registered agent; and
- the name, address, and signature of each incorporator.
For your convenience, the DCRA publishes a blank articles of incorporation form.
The plan of conversion, statement of conversion, and articles of incorporation all may appear straightforward. However, keep in mind that you also need to prepare corporation bylaws as part of the plan of conversion. Moreover, converting your particular business may involve unexpected complications. Therefore, it may be advisable to work with a business attorney to draft the required documents and otherwise complete the conversion process.
Your filing fee for this process will depend in part on the amount of authorized capital for the new corporation. The minimum fee, for a corporation with authorized capital up to $100,000, would be $220. This amount includes the cost for filing the statement of conversion including the attached articles of incorporation.
Washington, D.C.’s conversion statute states not only that all of your LLC’s property, as well as all of its liabilities, are automatically transferred to the new corporation, but also that conversion will not stop pending legal actions against your business. (More specifically, the statute states that “the name of the converted entity”—you new corporation —“may be substituted for the name of the converting entity”—your LLC—“in any pending action or proceeding.”) For more information, check D.C. Code § 29-204.06.
The foregoing information explains the basic steps for converting from an LLC to C Corporation. If you want to convert to an S Corporation, you will also need to file IRS Form 2553.
Apart from the foregoing steps, you will also need to take care of all the tasks normally associated with creating and maintaining a new corporation, such as:
- drafting corporate bylaws
- electing corporate officers and appointing corporate directors
- holding an initial board meeting
- issuing stock certificates
- using the official corporation name on your business documents; and
- filing a biennial report with the District.
It’s important that you follow all of these required formalities in order to ensure that your business continues to have limited liability and can take advantage of various potential tax benefits. For a more complete discussion of the steps involved in forming a corporation, consult Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State, by Anthony Mancuso (Nolo).
One other key step in the conversion process is to make sure that no business contracts or agreements, such as bank documents, leases, licenses, and insurance, will be nullified by your business’s entity change.
The IRS makes clear in a 2004 bulletin that, generally speaking, it will tax a statutory conversion as though the LLC members formally transferred all LLC assets and liabilities to the corporation in exchange for stock, and then immediately liquidated the LLC. However, the specific tax consequences for LLC-to-corporation conversions vary from one case to the next. Because the tax consequences can sometimes be significant, you should consult with a tax adviser before undertaking any conversion.
Other Considerations and Information
Our main concern here has been converting the legal form of your business from an LLC to a corporation. However, if you’re seeking to convert your LLC’s tax status from partnership to corporation without changing the LLC’s legal form, you only need to file IRS Form 8832 (to be taxed as a C Corporation) or IRS Form 2553 (to be taxed as an S corporation). (By default, the IRS taxes a multi-member LLC as a partnership and a single-member LLC as a so-called “disregarded entity;” there is no separate IRS tax category for LLCs.) While the IRS forms for changing tax status are fairly straightforward, do be aware that this procedure—known as “Check-the-Box”—involves special eligibility criteria; you can find those criteria in the instructions included with the forms.
Keep in mind that certain considerations may affect the timing of your conversion. For example, if you are converting to a C Corporation in order to make your business more attractive to outside investors, you will probably need to convert before any investment occurs. Conversely, if outside investors are not at issue, but the specific nature of your LLC’s assets and liabilities will lead to an undesirable tax burden for the current tax year, you may need to at least temporarily delay the conversion.
For additional guidance on converting from an LLC to a corporation, check Corporations and S Corporations vs. LLCs. For information on conversion rules in other states, check Nolo’s 50-State Guide to Converting an LLC to a Corporation.